SECTION 163 OF THE COMPANIES ACT, 2013
Option to adopt Principle of Proportional Representation for Appointment of Directors in the General Meeting of the Company
The appointment of directors is normally done through a simple majority in the general meeting of the company. As such, majority shareholders are in a position to select all the directors and a significant minority shareholder may not be able to appoint even a single director. To mitigate this disadvantage of the minority shareholders, section 163 of the Company Act, 2013 had provided that the minority shareholders could have an opportunity of placing their representatives on the Board of Directors where the concerned company adopts the system of proportional representation in their ‘Articles of Association’.
METHOD OF APPOINTMENT OF DIRECTORS UNDER THE SYSTEM OF PROPORTIONAL REPRESENTATION
Proportional Representation is a method of stockholder voting, giving individual shareholders more power over the election of directors than they have under statutory voting. The method of appointing a director under this section are:
The formula for calculating the Quota:
Votes needed to win= (Valid votes cast/ Seats to fill+1) +1
Formula to transfer surplus votes:
(Votes for next preference belonging to the original candidate /Total votes for the original candidate ) x surplus vote
Total number of candidates stood in the elections for the post of directors = 6,
number of directors required for the post = 4,
majority shareholders in number = 55
minority shareholders in number= 45
total number of shareholders =100
Assuming each shareholder has one share
No. of Votes = one vote per share multiplied by the number of directors to be elected
Total Majority has (55*4) 220 votes
Total Minority has (45*4) 180 votes
TENURE OF DIRECTORS: The appointment of directors may be for as long as 3 years or as may be decided by the shareholders since the term for the appointment of directors under this system is nowhere specified in the act. However, the appointment of directors under this provision may be made once every three years. The use of the term ‘may’ indicates that the stipulation of three years tenures is not mandatory.
NUMBER OF DIRECTORS THAT CAN BE APPOINTED UNDER THIS PROVISION: The minimum number of directors to be appointed through this system shall be 2/3rd which can even go beyond 2/3rd of the total number of the directors. Thus, it mandates that where a company adopts proportional representation, it shall appoint at least 2/3rd of its directors by this method. However, there is no cap on the maximum number of directors that can be appointed through this system of proportional representation.
CASUAL VACANCIES OF DIRECTORS APPOINTED UNDER THE SYSTEM OF PROPORTIONAL REPRESENTATION: Casual Vacancies of such directors shall be filled as provided in subsection (4) of section 161 which states that in default of and subject to the regulations in the articles, the vacancies shall be filled by the Board of Directors at its meeting and the person so appointed shall hold office only up to the date up to which the original director would have held office if his place had not been vacated.
SALIENT FEATURES OF PRINCIPLE OF PROPORTIONAL REPRESENTATION FOR APPOINTMENT OF DIRECTORS IN A COMPANY
1. The provision of the section is optional.
2. This section if adopted by the company in its Articles has the overriding authority over all other sections in the Act.
3. The intention behind the insertion of this section is to look after the interests of minority shareholders and giving them a fair chance to nominate their directors on the Board.
4. This section is applicable only for the appointment of directors and not for any other matter.
5. If Directors are appointed according to the principle of proportional representation, then they cannot be removed in terms of section 169 of the Companies Act 2013 regarding the removal of directors. They are also not liable to retire by rotation.
6. This Section is applicable for both Private as well as Public Company.
7. Exception: The provision of this section is not applicable to Government Company:
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